GBP/USD bulls are throwing in the towel at eight week highs

The British Pound pulled back from the highest level against the dollar in eight weeks on Wednesday, a high made as worries about the health of the global financial system continued to ease. At the time of writing, GBP/USD is down some 0.2% after falling from a high of 1.2361 to a low of 1.2302. 

Prior to today's pullback, the Pound Sterling rose by over 0.1% against the US Dollar to 1.2361, its highest since February 2 as it was supported by the rebound in risk appetite. The rebound followed cooling concerns about the banking sector turmoil sparked by US tech lender Silicon Valley Bank (SVB) and the emergency takeover of Credit Suisse by banking rival UBS. The worries of systemic stress had led to market volatility in the anticipation of more bank failures but these worries, however, have now faded. Investors took solace from First Citizens BancShares' agreement to buy all of the failed lender Silicon Valley Bank's deposits and loans.

Additionally, the fact that no further cracks have emerged in global banking this week is a positive. On Tuesday, Michael Barr, the Fed's vice chairman for supervision, told the Senate Banking Committee that Silicon Valley Bank's problems were due to "terrible" risk management, suggesting it could be an isolated case.

Meanwhile, on the domestic front, recently better-than-expected UK economic data may have provided some recent support as well. However,  talk of a policy pause clearly made the market nervous ahead of last week’s Bank of England meeting where the BoE hiked by 25bp to 4.25% with 7 members voting for a 25bp hike and two members voting for keeping the Bank Rate unchanged.

´´Overall, the forward guidance was limited with the BoE leaving the door open for another hike at the May meeting if persistent inflation pressures persist,´´ analysts at Danske Bank argued.

´´We revise our forecast to include a final 25bp hike in May, marking a peak in the Bank Rate at 4.50%,´´ the analysts said. ´´Our expectations are in line with current market pricing (currently 30bp priced until August 2023) as we expect the rest of the BoE committee to increasingly turn less hawkish amid a weakening growth backdrop and easing labour market conditions.´´

´´Markets are pricing in 30bp of cuts during H2.  We still believe that the first-rate cuts will not be delivered before the beginning of 2024,´´ the analysts concluded.